Inventory Reserve

What Is an Inventory Reserve?

An inventory reserve is a contra asset account on a company's balance sheet made in anticipation of inventory that can not be sold. Consistently, a company has an inventory that can not be sold in light of multiple factors. It might ruin, fall outdated, or become innovatively obsolete.

In anticipation of this, the company will make an entry on the balance sheet called inventory reserve. Inventory reserve accounts for the anticipated amount of inventory that can not be sold that year. Inventory is considered an asset, and inventory reserve is considered a contra asset, in that it decreases the net amount of inventory assets at the company.

Inventory reserve is an assessment of future inventory spoilage in view of the company's past experiences. When inventory that is unable to be sold is really recognized it is written down in official recognition of the loss.

Understanding Inventory Reserve

An inventory reserve is an important part of inventory accounting in GAAP. Tracking a company's inventory reserve permits that company to make a more accurate representation of its assets on the balance sheet. An asset is any great that has future value to the firm.

Since a portion of a company's inventory goes unsold every year, it's a good idea that the company would exclude the whole amount of its inventory as an asset on their balance sheet. The inventory reserve contra asset account deducts value from the inventory asset entry on the balance sheet to make a more accurate representation of the portion of inventory that will really be sold to make future value for the company. Without the inventory reserve entry, the value of the company's assets would be exaggerated.

A company gauges the amount of its inventory will "turn sour" in light of its past experience, its assessment of current industry conditions, and its insight into customer tastes.

Special Considerations

By accounting industry standards, inventory reserve is a conservative methodology. It endeavors to foresee inventory losses even before a loss has been confirmed to have occurred. Accordingly, inventories are comprised of goods that have future economic value, which qualifies them as assets. The principles of conservative accounting recommend reporting assets as close to their current value as could really be expected. Doing this with inventories requires a method to make assessments.

Sooner or later, a company should surrender that they have inventory that can't be sold. Such would be the case with a bed of spoiled tomatoes in a merchant's warehouse, for instance, or a stock of obsolete computer parts. At the point when this occurs, the company "discounts" those things, meaning it takes them under the table, and the company ingests the costs.

Features

• Inventory is considered an asset, and inventory reserve is considered a contra asset, in that it diminishes the number of inventory assets.
• Companies make inventory reserve accounts for the inventory they anticipate can not be sold that year.